Tips for Buying a Home with a Bad Credit Score

If you are thinking about buying a home with bad credit, know that it may not be easy, but it is achievable. With the right planning and preparation, you can go house hunting to buy before you know it.

Thanks to the pandemic, economic downturn, and other factors, 15 percent of Canadians are struggling with bad credit. This post explores some of the ways you can get the home of your dreams, even if your credit score isn’t as high as you’d like. Check out our tips below: 

Start Improving Your Credit Score Today

If you need to improve your credit score, you should start as soon as possible, ideally today. The earlier you can get going, the faster your score will rise. 

Raising your credit score usually takes around six months of concerted effort. However, once you get there, it’s relatively easy to stay there. 

To improve your credit rating: 

  • Pay your bills on time and don’t go into arrears
  • Don’t use your entire credit limit 
  • Pay your credit cards every month
  • Keep using your oldest accounts. Don’t close or change them. The longer your record, the more creditworthy you’ll become. 
  • Stay under your credit limit. Avoid using more than 30 percent of it if you can

Save For A Larger Down Payment

If you can stump up more of your own money when seeking a mortgage, banks and other financial institutions will be more likely to lend to you. 

In Ontario, Canada, the minimum downpayment on most mortgages is 5 percent. However, if you have bad credit, you might consider saving 20 to 25 percent of the purchase price. Doing this protects you against negative equity (owing more than your real estate is worth) while convincing lenders that you have some financial stability. 

Look For Mortgage Lenders Who Deal With People With Bad Credit

In Ontario, Canada, credit scores run from 300 to 900. If you’re below 600, most mainstream lenders will refuse to lend to you. However, if you go to a specialist lender, they may consider it offering you a mortgage under “subprime” terms. 

Be wary, though, that private lenders will want to lend to you at much higher interest rates, anywhere from 10 to 20 percent depending on your situation. Such onerous fees will seriously impede your ability to make repayments. 

Get A Co-Signer

Another strategy you can use is to rely on someone else’s good credit rating to secure a loan. With a co-signer, a third party, perhaps a financially prudent parent, promises to pay the lender if you don’t. 

Another option is a joint mortgage. You can do this if you’re living with someone else who shares the property with you, such as a spouse or partner. 

Choose A Smaller, Cheaper Home

Lastly, when buying a home, choose a smaller, cheaper option. Lenders might not be willing to lend you a sum as large as $500,000, but they may happily offer, say $60,000 to help you make ends meet.

Leave a Comment